Ins and Outs of

Digital Banks

Success and failure lessons of independent and

Incumbent-led Challenger Banks.

A Comparative analysis of market strategies looking at 80 Digital Banks globally

FinTech Strategy deep- Sector Deep-dive # 1:

dive and benchmarking

Ins and Outs of Digital Banks
collection
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 Executive Summary
The pandemic accelerated longstanding consumer trends in
The ongoing rise of open banking dissolves Banks Monopoly
Banking. The new world intensified the challenges banks were
on consumer Financial data, bringing flexibility and creating a
already facing and Speeding up the race for innovation and
more competitive environment for digital banks.
scale among key market players.
While funding and number of unicorns for Digital Banking tech
Neo-banks have demonstrated that simple products built on Banking in The rise of accelerated during 2021, only 13 Challenger Banks globally
new technology platforms with a digital-only approach can
operate at a fraction of the marginal and unit cost of the
the New Digital and are currently profitable. The pandemic is adding a significant

incumbent banks. Making Digital Banking to become a truly Decade Open negative impact on profitability and digital banks were
already fronting a profit gap compared to incumbents.
global phenomenon. Banking
Successful start-ups launched their products through
partnerships rather than through an immediate bank license,
Digital Challenger Banks' go-to-market strategy is primarily The Go-to- Success focusing to rapidly scale before expanding their offering.
driven by the maturity level of their market and entity type:
Market and failures Meanwhile, Incumbents have the Digital Bank initiative at the
start-ups or incumbent-backed. Consequently, they have
different product strategies, launching with either a Strategy lessons forefront of their strategy with a long-term investment
commitment.
transactional product or a full suite offering, including lending.
Digital banking failures in start-ups are linked to high
Start-Ups prioritize valuation over profit in the early stages,
reliance on funding making it highly susceptible to market
while corporate-baked players prioritize profitability from day
shocks. Their free or low-cost accounts are also a big hit to
one.
their balance sheets. While Incumbent led players fail by lack
of establishing a clear USP (unique selling point) to
differentiate itself from the digital-only banks.
3
C-INNOVATION
 • Skyrocket valuations
1. Banking in the New Decade
• Profitable brands
• Consumer trends
•• The pandemic's impact on profitability
Overview
• The new world
•• Failed
RevenueDigital
and Banks
cost oftimeline
sales
Contents • The race for innovation and scale •5. The
Unit Economics
Go-to-Market Strategy
• Gross profit and Gross profit margin
2. The Rise of Digital Banking •• Customers and
The set-up of volume
Digital Challenger Banks
•• “take-rate”
Go-to-Market Strategy | Four Key Elements
• Traits of Digital Challenger Banks •• EBITDA
Value Proposition
• The basis of competition •• Revenue breakdown by location
Target Segments
• A Global phenomenon • User Acquisition

Ins and
• Models of Digital Challenger Banks • Product Strategy
• Number of Digital Banks have accelerated
• They have reached stunning scale 6. Success factors – Independent Banks

Outs of
• SME market is the new playing filed
• Ways to measure success
• Successful Initiatives of Independent brands
3. Regional Variances

Digital
• Chime - Case Study

• Digital Bank models across regions

• Regulatory Implication
7. Success factors –Corporate-backed

Banks •
•
•
Adoption of open banking
Digital Banking Penetration by Country
Fast-growing countries in digital-only
• Initiatives of successful brands backed by
corporates
• Case Marcus – Case Study
banking adoption

8. Failures toward Digital Banking

4. Current state of Digital Banks

• Digital Bank Funding

• Why, some of the independent challenger
banks have quit.
• New Digital Bank Unicorns in Europe
• Incumbents' experiments in Digital Banking
have also failed.
C-INNOVATION
 1. Banking in the
new decade

Ins and Outs of Digital Banks

“In the new world, it is not the big fish that
eats the small fish, it is the fast fish that
eats the slow fish.”

Klaus Schwab
Founder and Executive Chairman of the World Economic Forum
The pandemic accelerated longstanding consumer trends in Banking

Before Covid-19 After Covid-19

(% of customers used service 2016) (% of customers used service 2021)

49% 57%
Internet
Banking

47% 55%

Mobile
Banking

40% 79%

Contactless
Payments

C-INNOVATION
Source: Capgemini's World Retail Banking Report 2020. Covid-19 Consumer Survey. Capgemini surveyed more than 11,000 consumers worldwide. Contactless data comes
from Nest Group on contactless adoption in the DACH region (Germany, Austria and Switzerland).
 Old world Digital world Pandemic world
(>2000) (2000-2019) (>2020)

Distribution Branch and telephone Digital touchpoints; branch and Branch and ATM use plummets;
serviced ATM use slowly falls digital use shoots up

Net interest Healthy spread

Increased transparency, Margins tighten further as
margins between deposits and
The new world lending interest rates
tightening margins interest rates drop

intensified the
challenges
Strong fees from cards and Customers shop around for lower Interchange and ATM fees drop
banks were Fee income ATMs, and from sales of other
financial products
fees; Regulators cap interchange sharply with consumer spending
fees
already facing

Loan portfolio Large loan books give big

Improved credit scoring enables Loan loss provisions shoot up as
incumbents a pricing
digital banks to price risk more entire sector hits trouble;
advantage
accurately defaults rise as businesses fold

8
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Source: Better banking businessmodels: embedded finance and the path to growth .11FS. 2020
 Traditional Banks Non financial digital players

Traditional core banking (System limitations)

Speeding up
the race for Number of customers
innovation
and scale
among key
market
players

Brand Challengers Start-ups and digital challengers

Intelligent digital services 9

C-INNOVATION

Source: Better banking businessmodels: embedded finance and the path to growth .11FS. 2020. Adapted C-Innovation.
 2. The Rise of Digital
Banking

Ins and Outs of Digital Banks

Image: Dragana Gordic.
Challenger Banks aims to compete with traditional banks largely based on
mobile-centric technology along with more consumer-friendly solutions.
Traits that characterize Digital Challenger Banks

Mobile focus Simple and Easy to use

Niche specific Faster to innovate

Address undeserved Leverage customer

segments data thought AI

Customer Centric Transparent

Free / low fees Integrated Financial

Management (PFM) tools

11
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Digital Banks have changed the basis of competition.
Neo-banks have demonstrated that simple products built on new technology platforms with a digital-only approach can operate at a
fraction of the marginal and unit cost of the incumbent banks.

Traditional Bank Model (Product-centric) Neobank model (Platform-centric)

• High community engagement
Branches • Large branch and ATM networks Mobile only • Open banking through APIs
• Best in class apps

• Outsourced technology • Open architecture

• Rigid platforms Advanced • Ability to Plug and play new functionalities
Legacy Tech
• Non-modular Tech with low scalability capabilities • High scalability
• Difficult to integrate third parties • Open eco-system

• Banking data divided into silos • Real-time data integration management

Product- Data-driven • Simple automated processes
• Mixed of paper-based and online data
centric • Data power business model through third
• Poor data management
party affiliation fees

• Build in house • Client centric

Culture Culture
• Business consensus • Launch fast -Take risks
• Cero risk tolerance • Leverage partners (Open platform)

Average customer Distribution and Average customer Distribution and

~$ 200 acquisition costs
27% channel costs $1- $ 38 acquisition costs
6% channel costs

12
C-INNOVATION
Source: Capgemini analysis; Buiseness Insider Intelligence. 2020
They have become a truly global phenomenon.

North America
250+ 200% Europe
Digital banks globally Increase since 2015

63 75

Asia Pacific
13
42 Hay
LATAM
54

Africa & Middle East

13
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Source: Neobank tracker and Noebanks.com As of December 28, 2021. Report Neo-banks. Exton Consulting. 2021
 Globally, we observe four models of Digital Challenger Banks.

Challenger banks Neo-banks

(with full banking license) (without full banking license)

FinTech Banks Backed by Corporates Partnership Independent

Start-ups that have acquired a Financial or non-financial Firms that partner with a bank Firms that have acquired other
full banking license. corporate brands that have license holder, to provide banking than a full banking license and
launched a digital brand products and services. provide "bank-like" services.

14
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Note: Non-exhaustive list.
 The increased number of Digital Brands can be seen all over the world as they reached
significant popularity from 2015 onwards. Incumbent banks initially ignored new entrants, then
they started copying them by setting up their own new digital businesses..
300
APAC Americas EMEA Total Number of Digital Banks

242 252
250
223
Sample of Incumbent-led banks
200 188 85 88
79
152 80
150
109 64
111 117
100 101
81
60 46
48 34 75
50 36 23 61
26 36 47
22 16 20
7 9 31 43 46 47
23 33
14 16 16 27
0 13 11 Sample of Independent Brands
2 3 4 5 6

Hay

Pre- 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

15
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Note: Non exhaustive list of players.
Source: Digital Challenger Banks: A Desire, A Dream, A Vision. BCG. 2020. The Financial Brand Neobank Tracker. 2022
 Some of the top independent banking brands reached remarkable scale
in less than a decade, with more than 70 million customers worldwide at
the end of 2021. 40

Millions of users by selected digital bank

“Our new customers come from traditional banks, where 25

folks are just kind of fed up with the fees and the lack of
transparency and all the things that go with large banks.”
20
Ron Oliveira, CEO Revolut USA
15 15
13 12
8

7 5 7
3 5 4
0.1 1 3
2 4 5

YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8

16
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Source: Financial results by digital bank and public news sources.
 The underserved SME market is becoming the new playing field for Challenger
Banks. In Europe, Revolut, Starling, Tide and Qonto have the highest number of
business customers and are the fastest growing players.
150%

135%
YoY growth in number of business customers

120%

105%

90%
(2020 vs 2021)

75%

60%

45%

30%

15%

0%

-15%

-30%
0 50 100 150 200 250 300 400 500 550

Number of business customers (Thousands)

17
C-INNOVATION
Source: Digital banks news and announcements. 2021. Holvi plans credit card launch, fundraise and IPO after split with BBVA. October 2021.
Note: Holvi saw an important reduction in customer numbers due to retreat from the UK, business been sold back to founder from BBVA and a new business
strategy moving out from a free business banking proposition..
 3. Regional Variances
and Regulatory Driver

Ins and Outs of Digital Banks

Digital Challenger Bank models varies across regions
Europe China

North America A balanced BigTech &

between Telco-Led
FinTech Banks Challenger
and Neo- Banks Singapore
High banks model
presence of
Neo-banks
leveraging Higher
bank presence of
partnerships Non-FI /
Consortium-
led

Latin America Australia

Regulatory India
liberalization
is occurring High presence of
(Mexico, Fintech Banks
Brazil), under driven by lower
Hay
evaluation Transaction-
interchange fees
(Chile, led business
and capital
Argentina) model
requirements
(Payment
Bank)

19
C-INNOVATION
Note: Non exhaustive list. ‘Xinja’ exited the banking business returning its ADI licence early this year and ‘86 400’ FinTech bank was
aquired by National Australia Bank Limited (NAB) in May 2021. ‘Grab Bank’ is to be launched by 2022 in Singapore.
The ongoing rise of open banking dissolves Banks’ Monopoly on consumer Financial
data, bringing flexibility and creating a more competitive environment for digital banks.

How do PSD2 and Open Banking What do the regulations imply for
regulations work? Challenger Banks?

Large Incumbent Banks Increase Partnerships with FinTech Players

Secure access to customer data available Expanded Greater Even cheaper

to third parties services speed to customer
offering market acquisition

20
C-INNOVATION
Source: The Rise of Challenger Banks. FT Partners. 2020. Adapted by C-Innovation.
The pace of adoption of Initial Steps (consultations, draft regulations)

open financial data also

varies across countries. USA Canada Colombia Nigeria Indonesia Saudi Arabia

Move to national law

If open finance Malaysia Hong Kong Japan Singapore

continues to accelerate,
it could reshape the Brazil Mexico Turkey

global financial services Grant licenses

ecosystem, change the
very idea of banking,
UK France Italy Ireland Norway Netherlands Denmark South Korea India
and increase pressure on
incumbents.
Spain Germany Finland Czech Republic Belgium Sweden Hungary Australia

21
Note: Although in Singapore there is no official open banking regulation/licensing in place, the country encourages
C-INNOVATION banks to be transparent regarding data, systems and services, and has awarded some digital banking licenses to
third parties e.g., Grab, Sea.
Source: Financial services unchained: The ongoing rise of open financial data. Mckinsey. 2021.
 Due to the new environment and playing field, countries are switching to digital-only banking
and the potential is still evident
Digital Banking Penetration and Potential by Country Total Market share potential for digital-only banking (%)

Customers that had a digital bank account in 2020 (%)

European countries are among the regions with the lowest levels of adoption
Consumers who are open to digital-only banking (%)
93% 92%
100% 87%
84%
90% 81% 81% 81% 80% 79%
80% 72%
39%
70% 41% 63%
61%
43%
41%
59% 59%
60% 37% 55% 54%
49%
50% 63% 61% 46%
66%
40% 48% 41%
47% 44% 35%
30% 44%
54% 51%
20% 44% 43% 41%
32%
26%
10% 19% 20% 19% 20%
14% 15% 14% 15%
10%
0%

C-INNOVATION Sources: Digital Banking trends - European countries are quickly catching up with digital banking adoption. C-Innovation. 2021. Banking Consumer Study: Making
digital more human. 2020. Global Digital Banking Index 2021. N26 and Accenture. 2021
Note: Data is sourced from Accenture’s Banking Consumer Study. It is one of the largest of its kind and is based on interviews with 47,000 banking customers in 28
markets. Selected countries are included in this graph.
Despite their relatively low levels of adoption, European countries are starting to gain
ground.
Between 2018 and 2020, the number of digital-only banking customers have accelerated across countries in western Europe

Increase in digital-only banking adoption by European Country Other fast-growing countries in digital-only
Percentage increased between 2018 and 2020 banking adoption
Percentage increased between 2018 and 2020

41% 73% in Brazil

40%
56%
58% in Australia
56%
35%
53%
82%
55 % in Hong Kong

44% 28%

46% in Malaysia

C-INNOVATION Sources: Sources: Digital Banking trends - European countries are quickly catching up with digital banking adoption. C-Innovation. 2021. Banking Consumer Study:
Making digital more human. 2020. Global Digital Banking Index 2021. N26 and Accenture. 2021.
Note: Data is sourced from Accenture’s Banking Consumer Study. It is one of the largest of its kind and is based on interviews with 47,000 banking customers in 28
markets. Selected countries are included in this graph.
 4. Current state of
Digital Banks

Ins and Outs of Digital Banks

“One of the critical things in this crisis we’ve
been trying to get across… is that we have
to throw away the rule book. We’ve never
seen this kind of crisis in our lives”
Ana Botín
Executive Chairman, Santander
 Funding accelerated during 2021. Banking and lending tech raised a total of $40 billion
across 1,061 deals, representing around the 30% of total FinTech funding, which is nearly
as much as the prior three years since 2018 combined!
Participation on the Total Number of Financing Volume Digital Banking/Lending
FinTech Funding deals by Sector in 2021 2015- 2021

$140 billions in capital raised by private FinTech

Digital banking / lending companies during 2021. $40 billion by Banking and
Fin. Management
(1,061 deals) lending tech start-ups.
Solutions

15% Billions ($) Number of deals

1200
31% 1061 Largest Selected
InsurTech deals
11% 3,480 1000
200%
FinTech 800 $1,000 m
Healthcare 4% deals 626 627 $900 m
Payments / IT 600 586
during 2021 534
399 $40 $800 m
400 484
15% $750 m
24% 200 $16
$14 $13
$9 $10 $10 $750 m
Wealth & Capital Payments/ Cards / Loyalty
markets Tech 0
2015 2016 2017 2018 2019 2020 2021

C-INNOVATION
Note: ‘Klarna’ provides mainly online financial services such as payments for online storefronts and direct payments along with post-purchase payments. However,
the Swedish financial markets regulator granted the fintech an EU-wide banking license in 2017. The fintech has used this license to roll out banking accounts in Sweden and in Germany
Source: Monthly Deal Activity. FT Partners. December, 2021.
Last year alone, 6 new Digital Bank Unicorns, valued at $8.8 bn, were added in Europe.
‘The Bank of London’ gained unicorn status at launch, making it the first ever pre-
revenue bank to win Unicorn status.
New Neobank Unicorns of 2021 FinTech Unicorns of 2021 by Category

7 years on average to
reach Unicorn status for European 12%
digital banks during 2021

30%

$2 $2
25
9
$1.7 19%
7
New Companies
5

$55bn
$1 $1 $1.1
6 16 1

12% In value 11%

8-Mar 18-Jun 12-Jul 13-Jul 19-Oct 30-Nov

16%

Company’s lifespan (Years)

Company’s valuation in billions (USD)

Banking Sofware Blockchain / Crypto InsurTech
Date on which Company reached Neobanking Neobrokerage Payments
Unicorn status
C-INNOVATION 27
Sources: CbInsights.com. December 2021
They have reached skyrocket valuations - Highest Valued Independent
Digital Banks in 2022

$2.5B
(Publicly listed)
(Publicly listed) $12B

$45B $2.5B

$9B
$2.3B

$6B $2.2B
$33B

$1.9B
$5B

$25B
$5B
(Publicly listed)

$21B
$4.5B

28
C-INNOVATION

Note: Valuation data as 20 January 2022

However, from those Challenger Banks only 13 are profitable
Notably, many of these players are Corporate-backed firms and come mainly from China and Japan. There are two European
FinTech Banks; Oak North and Starling bank.

29
C-INNOVATION

Sources: Emerging Challengers and Incumbent Operators Battle for Asia Pacific’s Digital Banking Opportunity. June 2021. Adapted C-Innovation
The pandemic is having a significant negative impact on profitability and digital
banks were already fronting a profit gap compared to incumbents.

Traditional Banks Neo-Banks

Performance Performance

Average products per customer 5 Average products per customer 1.5

Profit per customer (pre covid-19) Loss per customer (pre covid-19)
€150 to €350 (€30 to €40)

Pandemic expected impact to the overall industry

Household incomes Discretionary spending Loan volumes Transaction volumes and value

Post- Pandemic Post Pandemic

Expected Profit per customer €50–€200 Expected loss per customer (€20 to €75)

30
C-INNOVATION
Source: Detour: An altered path to profit for European fintechs. 2020..
While few incumbent-led Challenger banks have quit before Covid-19, the impact
of the pandemic on Digital Banks is visible.
by
Approx.. Company’s lifespan
1.5 Years 6 months
Founding date
Date of Closure/acquisition/business exit
by
4 Years

by
(Originally founded in 2009, acquired by BBVA in Feb. 2014)
7 Years

incumbent-led 3 Years

by
3 years Covid-19
2014 2015 2016 2017 2018 2019 2020 2021

• Interest rates start • Brexit transition period starts

• Lowest levels of interest rates seen globally since 2009 • Two-year countdown to the UK
to recover In the • Covid-19 impacts the world
formally leave the EU + extensions
USA and Europe • Interest rates go back to pre 2016 levels

Independent 3 Years

4 Years

4 Years

(Founded in 2011 as a direct-to-consumer banking app, now completely tied to its enterprise business)
9 Years
31
C-INNOVATION Note: Selected examples non exhaustive list.
 5. The Go-to-
Market Strategy

Ins and Outs of Digital Banks

The set-up of Digital Challenger Banks launched by start-ups differs significantly
from brands backed by corporates.

Independent Digital Banks Digital Banks Backed by Corporates

(Launched as Neo-banks or FinTech Banks) (Financial or non-financial brands)

● Young and bold company. ● Inherits/leverage traditional brand.

● Build brand and customer base from scratch. ● Strong brand recognition and large customer
● Usually starts by offering a single product. i.e. base.
savings or lending. ● Targets new segments or new geographies.
● Free proposition to quickly gain scale and ● A full suite of products offering.
market share. ● Focus on high margin products to monetize
● Prioritize valuation over profit in the early customer base.
stages. ● Prioritize profitability from the start.

33
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Go-to-Market Strategy | Four Key Elements

Value Target User Product

Proposition Segments acquisition Strategy

34
C-INNOVATION
 Value Proposition | It is customer-centric and customer-focused to provide
affordable and accessible financial services with improved customer experience.

• Digital Challenger Banks usually offer low or fee

free propositions.
Pricing • Better pricing is reached by leveraging its
technology stack.
• Value is passed to customers.

• Delivers full suite of services through mobile device

and engage with customers digitally.
Accessibility
• Aims to improve accessibility to financial services
for the unbanked and underbanked population.

• Strong focus on customer experience

• Leads to greater personalization, ease of use, and a
Experience wider variety of product features
• Offers a stronger Experience proposition for users
than traditional players

35
C-INNOVATION
Images: Bunq Bank.
 Target Segments | It focuses on the digitally savvy and underserved segments in
mature markets. To serve the unbanked, Neo-banks target less mature economies.

Freelancers, start-ups and

small- and medium-sized
Enterprises (SME)
Designed for young people.
Millennials. Income ($35K-
Users are between 18 and 35
$70K a year)
years old.

Students
Millenials
Generation Z, digital savvy Digital Savvy Employees Underserved and Students, middle class
and self-directed population Expats

(High digital expectations,

Microbusinesses Unbanked and millennial segments
Freelancer
quick adopters) Start-Ups
SMEs
(Neglected by Incumbents)
Low income

Unbanked population,
Mobile-first and mobile-only with 81% of customers
young adult generation under 45 years old.

36
C-INNOVATION
 User Acquisition | Corporate backed challengers
leverage their heritage to build the brand, but
also embed on-boarding processes into existing
customer journeys.

Awareness Consideration Onboarding

• Design great
• Market to new users onboarding
• Create virality – word • Competitive pricing experience. Fast and
of mouth, social • Offering to address a hassle-free on-
media. clear customer pain boarding Usually
• Build Partnerships for point within mins and
Independent wider reach. minimum customer
effort.

• Market to new • Integrated with

• Competitive pricing
segments and/or existing customer
• Offering to address a
geographical zones journeys from parent
clear pain point.
• Focus on Social company.
• Usually offers a full
media marketing • Seamless, simple
suit of products and
Backed by • Reinforce heritage to extension of services
services.
Corporates build trust. from parent
company.

37
C-INNOVATION
 Product Strategy | Independent start-ups typically focus on growing very quickly
using simple payment products and easy to get licenses, while corporate backed
companies are incentivized by customer monetization from day one.

Independent Challenger Banks Backed by Corporates

Quick go to market Leverage Banking License

Revolut app years back.
• Start with payment license (or the • Uses parent company banking license
equivalent) or Go-to-market after acquiring a full
• Later acquire a full banking license or license, if parent company outside of
partner with a license holder. financial services
Simple offering Full Product suite
• Typically launch with a transactional • Usually launch with banking, saving
product. accounts and lending proposition.
• Then extend offering through Monetization is key
partnerships • Broader porfolio enables cross-selling
Focus on Acquisition and better credit risk assessments.
• Aims to grow user base quickly • Lending offer high profit margins
• Payment products have lower barriers Leverage on parent brand
to adoption • Brand familiarity and trust enable
Build New brand attraction of deposits, which helps fund
• which helps to rapidly gain insights on lending business
OpenBank app by Santander
customers and the market relaunched in 2017.

38
C-INNOVATION
 6. Success factors –
Independent Banks

Ins and Outs of Digital Banks

Arguably,
there are
many ways to Profitability
measure
success for
Digital Banks.
Outstanding Customer growth
Profitability is the
obvious one, however,
for independent
challengers there are
additional elements
that could show the
potential and appeal of Company Valuation
the start-up, such as
the number of
customers, their current
valuation and its ability
to raise funding. A mix
of these factors will
determine the interest Funding raised
investors show to the
business model.

C-INNOVATION
Note: Selected examples for illustration purposes, non an exhaustive list.
 From setting up the right structure to using the right local
marketing approach

1. Speed • Quickly setting-up and

2. First-
lane tapping into consumers first.
mover
approach

Key Initiatives of 3. 4. • Creating a strong and unique

Continues Abundance 5. A niche
successful to build on of revenue approach in banking proposition.
offering streams credit
Independent
Digital
6. 7. 8. Urgency 9. Primary • Strategy focused on better
Challenger Partnerships Experience addressing bank serve customers.
at the core d team customer objective
Banks needs

11.
Higher 12. Shifting • Using marketing and promotions
10. Viral Saving to Paid
Experience to fast-track growth.
rates Marketing
offered

41
C-INNOVATION
 Quickly setting-up and tapping into consumers first.

1 Speed lane approach

Rather than going for a full banking license from
the beginning, these FinTechs were able to launch
their product through partnerships and other
investments, allowing them to avoid a time-
consuming process (application for license) in
such early stages. They had more time to focus on
Key Initiatives how to rapidly scale and increase customer
of successful awareness before expanding their offering.

Independent
Digital 2 First-mover advantages

Challenger
Recognizing the need for alternative bank
Banks offerings in their local markets, and addressing
that need early, allowed FinTechs to establish
itself quickly as a household name in their
specific region.

42
C-INNOVATION Notes: Selected examples.
Key Initiatives of successful Independent Digital Challenger Banks
Creating a strong and unique banking proposition
3 Continues to build on offering
5 A niche approach in credit
Unique proposition and features, with the
ability to quickly build relevant offerings
that cater to customers' needs has worked
as a powerful driver of customer
acquisition and loyalty among key
untapped audiences.

4 Abundance of revenue streams For NuBank, credit cards were a key factor of
differentiation and they helped to build brand and
Successful FinTech banks has moved from
confidence among prospects. That is because
offering a single product to a wider
customers tend to struggle to trust a new
proposition allowing more opportunities to
company to hold their money, so acquisition
monetize customers and move towards
costs are higher. For Oak North, SME lending and
profitability. Revolut for example Card &
Funding Societies are leveraging its peer-to-peer
Interchange fees represents 43% of total
business to integrate the banking sector in
revenues, away from 97% back in 2017. Still
Singapore.
need to reach profitability.
43
C-INNOVATION
Notes: Selected examples.
 Strategy focused on better serve customers.

6 Partnerships at the core

Partnerships has led Digital Banks to quickly add new
services, drive down costs and accelerate grow. Qonto is
a good example with its partner LegalStart, an online
business incorporation platform which helped Qonto
acquire a third of its new customers. Today, Revolut
Key Initiatives
counts with more than 40 partners.
of successful
Independent 7 Experienced entrepreneur team
Digital
Effective start-ups have founders who have
Challenger successfully grown a start-up before or have
Banks broad experience in financial services or
Technology companies. Oak North founders,
for example, funded the company from the
sale of an earlier research start-up.

44
C-INNOVATION C-INNOVATION Notes: Selected examples.
 Strategy focused on better serve customers.

8 Urgency addressing customer needs

On the onset of the coronavirus pandemic, Digital Banks
positioned themselves to quickly support customers, creating
great sense of customer care and visibility among clients.
Current was the first to credit government stimulus checks
and Chime disbursed over $1 on loans very quickly.
Key Initiatives
of successful
Independent 9 Primary bank objective
Successful players are focused to create a holistic
Digital range of value propositions that capture total customer

Challenger value, making customer life-time more relevant. For

example, since conception in India, Niyo targeted salary
Banks management, then extended to employee benefits
allowing employees to increase take home salaries.
Similarly, with a mix of competitive accounts with
unique features such as “Get Paid Early”, Chime brings
clear user benefits. It is now followed by other
challenger banks as Current and Revolut.
45

C-INNOVATION Notes: Selected examples.

 Using marketing and promotions to fast-track growth.

10 Viral Experience Successful Digital Banks not only offer customers a product,
but also a status symbol. It marks them out as special, and
users will gladly share their experience with anyone. This
product virality fuels an accelerated rate of adoption, which
naturally increases sales and income. No paid campaigns
needed, just a natural, simple, rewarding experience.

Key Initiatives Offering higher rates on savings compared to

11 Higher Saving rates offered
traditional banks and other digital banks has helped
of successful Start-ups, specially in the US and Australia, to grow
Independent very quickly in terms of number of customers and
deposits since launch. However, some have proven to
Digital be unsustainable.
Challenger
Banks 12 Shifting to Paid Marketing
Monzo and Chime both saw a big increase in customer
numbers after deploying marketing activity across digital and
offline channels. Monzo grew its customer base from 500k in
2018 to 4.4 million in 2020, whilst Chime spent $32 million on TV
and social media ads during the first eight months of 2019,
tripling its number of customers at the end of the year.
46

C-INNOVATION Notes: Selected examples.

Case Study
Chime does not have a banking license and instead offers a bank account that
simplifies money management via partnering with an FDIC-insured bank. banks.
Chime was founded in 2013 to cater to the underbanked population; the “frustrated traditional bank consumer, bogged down by fees and
extra charges”. The fact that it has not applied for a full banking license has allowed Chime to avoid going through a complicated and
expensive process, while remaining focused on its main operations. In addition, the costs of partnering with an issuing bank are also
dramatically less than servicing its own bank charter. They benefit from lower capital requirements and lower customer acquisition costs.

Provides banking services through partnering with

1 The Bancorp Bank and Stride Bank, instead of
having a banking license itself.

Proposition designed for millennials, who

2
expect services to be personalized and mobile-
first. Average customer earns between $35,000
and $75,000 a year.

An interchange-based revenue model, which

3 means it earns revenue from debit card
transaction fees paid by merchants.

Has focused on building apps and constantly

4 updating its platform with the latest products

before customers knew they needed the
upgrades.

48
C-INNOVATION
Sources: Public news sources and company announcement and website.
The start-up has converted its popularity by steadily building a loyal base of
clients.
Its strategy includes offering products for free, heavy spend on marketing and focusing efforts on promoting features which better equip
customers to use their card for shopping. Examples include the “Get Paid Early” feature, which directly benefits Chime’s interchange-based
revenue model and customer loyalty.

1 2 3

● Offered products for free which banks have ● Massive growth has been reached by ● Focus on being customers primary
traditionally charged money for. All wrapped spending heavily on marketing bank. Promoted “Get Paid Early”
in an app! ● $32 million spent on TV and social media features via ads.
ads during the first eight months of 2019 ● Requires customers to sign up for
drove huge customer growth. direct deposit to access key
banking features.

49
C-INNOVATION
Sources: Public news sources and company announcement and website.
Source: Start-ups newsroom. Forbes and Chime website . As Sept 2020
Chime has seen massive customer growth and a skyrocketed valuation
Chime’s massive growth is mainly attributed to a combination of zero-fee alternatives to Wall Street banks, high
advertising efforts and customer referrals. Also, its ability to quickly build relevant offerings that cater to customers'
needs are a powerful driver of customer acquisition and loyalty among key untapped audiences. Chime was at
$25B
valued at $1.5 billion in March 2019 and today it is the highest valued consumer Fintech in the U.S.
$14B
Funding raised by year Accumulated funding (millions) Valuation
$2,043.8
$5.8B
$1,293.8
$0.5B $1.5B
$70M
$10m Series C $808.8
$9M $18M
$3.8M $8M
Early VC Series B
Seed Early VC $750M
$108.8 $700M $485M Series G
$3.8 $11.8 $11.8 $20.8 $38.8 Series D + E Series F

2013 2014 2015 2016 2017 2018 2019 2020 2021

15
12 10 13.1
Number of Customers (millions) 6.5 8
9 4
1 1.6
6 0.8
0 0.1 0.1 0.2 0.3 0.5
3
0
2019. $32 million spent on TV Mars 2019. Triple Sept 2019. Added 2 2020. Introduced a new Aug 2021. Hits $25 billion
June 2018. Reached 1
and social media ads. “Get valuation and claims to million customers in 1.6% interest rate on valuation as part of a new
million customers mark,
Paid Early” campaign drove be the fastest growing just 5 months. savings accounts and funding round that brought
growing mainly from
huge customer growth. U.S. digital bank. Dec 2019. Quadruples Launched a credit- in $750 million.
customer referrals.
valuation. building credit card.
50
C-INNOVATION
Sources: Public news sources, company's announcement and website. Dealroom.co for Valuation and data on funding.
 7. Success factors –
Corporate-backed

Ins and Outs of Digital Banks

 Identifying cost-efficient sources of innovation, while also aligning
culture and strategy in the long-term.
2. It serves
3. Long-
1. Digital bank new • Integrating the Digital Bank
at the forefront term
growing into the long-term strategy.
of the wider strategy
markets or
group’s and
new
strategy investment
segments

Key Initiatives of 4. Tie-up

between an 5. • Identifying cost-efficient acquisitions
successful incumbent Partnerships and sources of innovation.
bank and an
Digital Internet giant

Challenger
6. Deeper 7. Clear model • Effort to better understand the
Banks backed understanding for customer target market.
of customers engagement
by Corporates
10.
8. Offering 9. Reinforcing • Leveraging the corporate
Changing
higher rates on incumbent
the brand and building a
on savings heritage to forward-looking
build trust corporate
account
culture Corporate Culture.

52
C-INNOVATION
 Integrating the Digital Bank into the long-term strategy
Digital bank at the forefront
1 of the wider group’s strategy Hello Bank! counted on the support of over 500 people
globally to launch operations in Belgium and 80 million
euros were invested by BNP to ensure its success Europe-
wide. Similarly, Openbank is widely supported by Santander
Group as a vehicle to develop global blueprint across
markets.
Key Initiatives of It serves new growing
successful United Overseas Bank (UOB) in Singapore launched TMRW 2 markets or new segments
Digital to serve a different customer segment under a different
branding in Thailand and Indonesia. For a bank
Challenger traditionally focused on corporate clients, such as

Banks backed Goldman Sachs, to start serving individuals was a big step.

by Corporates Long-term strategy and

3 investment
BNP Paribas is integrating Hello Bank, actively focusing on
client needs and developing products and services that
address a wide range of demands. All the knowledge and
learnings obtained from its digital brands, then are used
across all the channels of the bank. Likewise, TMRW Value
creation will come from synergies with UOB as One-Bank.
53
Notes: Selected examples.
C-INNOVATION
 Identifying cost-efficient acquisitions and sources of innovation
aiBank serves as a distinctive global example whereby it
Incumbent bank and leveraged CITIC Bank’s financial expertise and well-
4 Internet giant Tie-up developed offline channels, as well as Baidu’s advanced
technology and large online customer traffic, in order to
create greater innovative capacity, stronger technological
ability and provide a large online customer base thanks to
the customer traffic of the Internet parent company. In
Key Initiatives of general, digital brands have huge benefits in the form of low
cost of acquisition and activation due to their association
successful
with their parent companies, which had lots of potential
Digital customers and data on which the challenger could leverage.

Challenger
Banks backed Partnerships are used as a cost-efficient source 5 Partnerships
of innovation. Fintech partnership represents a
by Corporates ready and cost-efficient source of innovation
that allows banks to preserve their relevance
and even enhance their service standards to
customers, while tapping into an external talent
pool of young minds is more efficient and much
faster when influencing internal cultural
changes.
54
Notes: Selected examples.
C-INNOVATION
 Effort to better understand the target market
Deeper understanding of For Frank by OCBC (Overseas-Chinese Banking
6 customers Corporation), paying careful attention to customers
interests, needs and pain points were key to improving the
customer experience. Social media intelligence tools help
with discovering trending topics among youths and niche
interest groups, as well as local forums which were a

Key Initiatives of source of valuable information. Marcus used a different

approach and interviewed over 100,000 potential
successful customers about pain points, making it able to more
Digital clearly identify and adapt to its target.

Challenger Clear model for customer

Banks backed Customer engagement also plays a key role in 7 engagement
Digital Banks backed by corporates. For example,
by Corporates UOB’s is focused on deepen customer
engagement, as their primary performance
indicator rather than cross sell. Frank to engage
customers, offers a variety of useful online content
that cater specifically to the financial needs of
youths.

55
Notes: Selected examples.
C-INNOVATION
 Building a forward-looking Corporate Culture.
Offering a higher rates on
8 savings account In an approach typical of many digital banks, Marcus saving
accounts offer a market leading interest rate in the US and the
UK , which has fueled customer numbers and caused deposits
to grow. Marcus reached $96bn in deposits in 2020, and more
than 4 million customers in its first 4 years of operations. High
interest rate offering has been a big factor driving this growth.
Key Initiatives of Reinforcing on incumbent
successful Goldman Sachs research found that using “by Goldman 9 heritage to build trust
Sachs” in the Marcus name increased trust of the brand.
Digital Customers’ willingness to provide personal information
Challenger and purchase intent went up significantly when they
knew the digital brand was backed by Goldman. Most
Banks backed incumbents have followed this approach.
by Corporates Changing the corporate culture
10
Moving into a more dynamic, flexible and tech-focused
culture has helped Incumbents to navigate the ecosystem.
Marcus is composed of a blend of expertise which comes
from inside and outside financial services. BBVA FinTech
competitors have been a source of cooperation and learning,
whilst DBS cultivates a digital culture with its Digibank brand.
56
Notes: Selected examples.
C-INNOVATION
Case Study
Since 2016 Goldman Sachs has been building a leading consumer bank

58
C-INNOVATION Source: Goldman Sachs Strategy documents. 2020
It is diversifying from the capital markets-heavy businesses which historically
has generated most of its revenue.

Goldman Sachs Revenues participation by Segment

59
C-INNOVATION Source: Goldman Sachs Strategy and Financial documents. 2020
Building an integrated platform via Marcus proposition.

Integrated & Self-Reinforcing Strategy New Products & Partnerships

“ ur core values have endured for 150 years, driven by a spirit of partnership”
Goldman Sachs, Investors day
60
C-INNOVATION Source: Goldman Sachs Strategy and Financial documents. 2020
Goldman Sachs does have a track record of change and innovation.
CEO David Solomon said last year that the firm hoped to become a “banking-as-a-service” provider for big corporations.

61
C-INNOVATION Source: Goldman Sachs Strategy and Financial documents. 2020
Getting great results as it progresses five years on.

Deposits ($Bn) Customers (millions)

Loan / Cards volume ($Bn)

$125 + ~5
$20 + $97

$60
$7 $8 $36
$5
0.20

2018 2019 2020 2024 Target

2018 2019 2020 2024 Target 2016 2019

62
C-INNOVATION Source: Goldman Sachs Strategy and Financial documents. 2020
Future growth is focused on scaling the digital consumer banking proposition,
concentrating on transactional banking and wealth management

63
C-INNOVATION Source: Goldman Sachs Strategy and Financial documents. 2020
 8. Failures toward
Digital Banking

Ins and Outs of Digital Banks

“If you are afraid to fail, then you should go
and become a banker.”

Yossi Vardi
Israeli entrepreneur and investor.
Why, some of the independent challenger banks have quit.

2. Struggled • The collapsed of

1. High to raise capital raising tactics
reliance on capital
funding during
COVID-19

3. Failed • A broken business

profitability Didn’t find model
with a free product-
proposition market fit
model

“They made very bad decisions about the way money was
spent while not a lot was delivered”
Former Xinja employee

66
C-INNOVATION Sources: Public news sources, company's announcement and websites.
 The collapsed of capital raising tactics
1 Highly reliance on funding
Moven was one of many Neo-banks offering services at little or
no cost, leaving it reliant on outside funding to sustain its
business. Moven faced an additional hurdle in that divided
attention from investors between its two businesses (D2C, B2B)
created an “ongoing funding challenge.” Similarly, To sustain its
operations, Xinja became desperate for capital and introduced
the company to investors from China and the Middle East. The

Why, some of funding deal was so large it needed to be approved by the

Foreign Investment, the money never materialized.
the
Struggled to raise capital
independent
2 during COVID-19
challenger The coronavirus pandemic interrupted many Digital
Banks plans. Moven, for example, had funding lined
banks, have up that would have enabled the spinoff towards DTC
quit. business, but that funding disappeared once the
crisis hit. At that point, the firm determined it would
likely have to absorb a $2 million loss in 2020 if it
continued to operate the consumer-facing side of
Moven.

67
C-INNOVATION C-INNOVATION Notes: Selected examples.
 A broken business model
Failed Digital Banks’ free or low-cost accounts are a major draw to
Failed profitability with a free
3 proposition model users, but they’re also a big hit to the Neobanks’ balance sheets. For
example, Xinja to attract customers offered top interest rates on
savings accounts, which had an overwhelming demand, however,
without having developed a lending business, the company
received no income from borrower repayments, leaving it in a
position where it was burning shareholder cash. Meanwhile, Moven
acknowledged that it would incur the $2 million loss in 2020,

Why, some of specifically because it didn’t charge much for its services. 86 400
said NAB’s backing would allow it to boost its balance sheet in a
the way that would have otherwise taken five years.

independent
challenger Yelo was early to test a neo-banking solution for the 4 Didn’t find product-market fit
blue-collar segment, if offered personalized offerings to
banks, have customer-profiles, such as manufacturing and

quit. construction workers, security guards, truck drivers,

farmers, and gig economy workers, among others, to
provide a wide range of services, from banking and
payments to credit and insurance. However, the
company struggled to figure out a business model and
the pandemic caused severe damage to its plan. Yelo
suspended operations in July 2021.
68
C-INNOVATION C-INNOVATION Notes: Selected examples.
Incumbents' experiments in Digital Banking have also failed

2. Lack of • Weak Value

1. Limited clear UPS Proposition
products (unique
and selling
features
point) .

4. Lack of • Faded the need for a

3. Crowded digital-only brand
long-term
and mature
strategic
market
commitment

69
C-INNOVATION Sources: Public news sources, company's announcement and websites.
 Weak Value Proposition
Digital Banks from Incumbent such as Bó by RBS and B by
Limited products and
1 features Clydesdale Bank in the UK launched with very limited
features. For example, wages were not able to be paid
directly into Bó accounts, which was a major drawback in
attempts to compete with other digital banks. In another
approach, B offered app-based current accounts that
were paired with a savings account, so to open the instant
by by savings account, customers had to first open a current
Reasons of account with B – which also gave them just a small rate of
Incumbents interest.

failures Lack of clear USP (unique

Incumbents' brands straggled to find a way to stand out 2 selling point)
toward Digital and establish a USP to differentiate themselves from the

Banking digital-only banks. There was no significant difference

between Finn and JPMorgan Chase's conventional mobile
banking app. Finn was built on top of the same back-end
infrastructure as the bank's conventional mobile banking
app. As such, the two looked very similar, there was no
value add nor differentiator significant enough to convince
customers to go through the hassle of downloading,
setting up and using a separate app and brand.
70
C-INNOVATION C-INNOVATION Notes: Selected examples.
 Faded the need for a digital-only brand
In the UK there were plenty of players and apps from both fintech
Crowded and mature market
3
challengers and well-established lenders. In fact, for the same
reason N26 pulled out of the UK, and this retreat is a far cry from
Monzo’s 3.5 million signups at the time of the banks closure.
Similarly, Finn could not compare with market-leading features
offered by other challenger brands. One reason digital challengers
attract customers is that they offer market-leading services.
Goldman Sachs' Marcus, for example, offered US customers an

Reasons of by
interest rate of 2.25%, one of the leading rates in the country, and
accumulated $60 billion in deposits since launch in 2016 at time of
by
Incumbents Finn’s closure. This was likely a further blow to Finn's success.

failures Lack of long-term strategic

toward Digital
Chase did not focus enough on Finn to make it a success. 4 commitment
While Chase was looking to establish Finn in the US, it also was

Banking focusing on increasing its physical presence. In 2018, the bank

announced it would open 400 new branches in the next five
years to expand into new cities. So, although Finn was built to
reach new areas of the US, rolling out branches in those cities
likely diminished the need for a digital-only brand in those
locations. In the case of Bó , the pandemic forced RBS to
refocus its investment strategy. The bank set aside set aside $1
billion in credit loss provisions due to the crisis. Due to this,
there was very little wiggle room left for Bó funding.
71
C-INNOVATION
C-INNOVATION Notes: Selected examples.
 Key take-aways
● Rather than going for a full banking license from ● Successful Incumbents have the Digital Bank
the beginning, successful Digital Banks were able initiative at the forefront of their strategy with a
to launch their products through partnerships or long-term investment commitment. They
through investments other than via the pursuit of envisage that their pure digital offering will expand
a banking license. They focused on rapidly into more growth markets or segments where they

Ins and achieving scale and customer awareness before

expanding their offering. In order to do this, they
have not previously been present. They reinforce
on Incumbent heritage to build trust across the

Outs of create an ecosystem of partnerships and invest in

entrepreneurial teams who are creative and
brand and cultivate a digital culture among all
employees with a mix of IT and banking skills.

Digital
experts in marketing. ● High reliance on funding has made start-ups
● The fact that many Neo-Banks have not applied highly susceptible to market shocks. Their free or

Banks
for one full banking license allows them to avoid low-cost accounts are a major draw to users, but
going through a complicated and expensive they’re also a big hit to their balance sheets.
process, while allowing them to remain focused ● Incumbent led digital offerings resulting in
on their main operations. unsuccessful players comes from limited
● Oak North Bank and Starling Bank followed a very offerings and a lack of establishing a clear USP to
different approach as they started with a full differentiate themselves from digital-only brands.
banking license and focused on business Crowded and mature markets, as well as lack of
profitability rather than customer acquisition. This long-term strategic commitment from parent
effort is paying off. companies, have also played a key role.
72

C-INNOVATION
 The research team
Research Analyst
Isabel Richardson
Isabel is a recently graduated economics
student from the University of Queensland,
Australia. She has split her studies between
Australia and France, where she also attended
Sciences Po in Paris. She has a personal
interest in sustainable investment as well as
regulations in the finance industry.
C-INNOVATION
For any feedback, comments or any research suggestion feel free to reach us at hello@c-innovation.eu
Social Media and Digital
Tessa Ponce de Leon
Tessa is in her third year of undergraduate
degree, which she studies in France. Her
degree links Business Administration,
Economics, International Relations and Brand
Management. She is currently in Vienna where
she is doing an exchange program, further
highlighting her international background.
Leading Consultant
Javier Guevara Torres
Javier is co-founder and CEO of C-
Innovation. Having worked with both
technology companies and corporates
such as HSBC and Santander, he has a
unique view of the challenges from both
sides of the table.
73
 Appendix

This research has been built taking into consideration analysis of 80 global banking players across 7 geographies including
Australia, China (Taiwan and HK), Europe, India, Latin America, Asia-Pacific and the US.
Asia-Pacific
Australia China Europe India Latin America US
(Excluding China)
Ubank Bank CCB Mobile Bo Yono Nequi Digibank Marcus
Easy Street ICBC Mobile Hello Bank 811 Mach UOB Mighty Finn
Up Payment Openbank Fino Payments Bank Banco Original Singapore Azlo
RaboDirect Pig An Bank B Jio Payments Bank Next Frank BankMobile
West One Richart BBVA Yes Bank Rebanking TMRW Rising Bank
Volt Bank aiBank Quonto Niyo Albo Funding Societies Varo Money
Xinja WeBank Bnext Open Uala Tonik Moven
86400 MyBank Revolut Paytm Bank Nubank TenX Chime
Judo Neat Bunq Payzello Zinobe Arival Current
Hay Ant Bank N26 येLo (YeLo) Banco Inter SA Aspire Simple
XWBank Tinkoff YouTrip Upgrade
Starling Bank KakaoBank Sofi
Monzo Sony Bank
Oaknorth

74
C-INNOVATION
For any feedback, comments or any research suggestion feel free to reach us at hello@c-innovation.eu
 Stay tuned for more!

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